What’s Next for Employers Under the FLSA Overtime Rule?

Update: On June 27, 2017, the U.S. Department of Labor (DOL) sent a request for information (RFI) on the 2016 overtime rule to the Office of Information and Regulatory Affairs. Generally, such requests signal that a government agency is looking for information to determine whether there is a need for a new rulemaking.

Under the Trump administration, a revised-yet-again overtime-pay rule could raise the salary threshold for exempt status, but not as much as the Obama administration wanted. It could also reduce some of the complexity around compliance that Obama's Department of Labor (DOL) included in its now-blocked rule, according to Tammy McCutchen, former administrator of the DOL's wage and hour division under President George W. Bush and a principal with Littler in Washington, D.C.

U.S. employers have been in legal limbo when it comes to compensating employees under the Obama administration's revised Fair Labor Standards Act (FLSA) overtime rule, said McCutchen. (Employers subject to the FLSA are required to pay nonexempt employees working more than 40 hours per week at a rate of time-and-a-half.) After the revised rule was issued last May, many employers either reclassified some exempt employees (those earning salaries below the new threshold) as nonexempt (paid hourly), or raised their pay to avoid reclassification. McCutchen, who served on Trump's transition team, shared some ideas on what these employers can do in light of future regulatory changes she expects to see.

The DOL is, for the most part, "not doing anything right now," as the department awaits Senate action on Trump's nominee for Labor secretary, Alex Acosta, said McCutchen, speaking on March 14 at the Society for Human Resource Management's (SHRM's) Employment Law & Legislative Conference in Washington, D.C. Acosta's confirmation hearing before the Senate Health, Education, Labor and Pensions Committee is scheduled for March 22.

Blocked but Not Repealed

Before she gave her forecast for what's ahead, McCutchen reviewed some pertinent background of how we got to where we are. Most notably, a DOL final rule revising the FLSA overtime regulations was released by the Obama administration in May 2016. But on Nov. 22, a federal district court judge in Texas
placed a temporary injunction, effective nationwide, on the revised rule, preventing it from taking effect on Dec 1.

For now, the rule's implementation and enforcement are on hold. The matter has been appealed to the 5th Circuit Court of Appeals, and on Feb. 22, the DOL moved for an additional 60-day extension—until May 1—to file its brief, citing the absence of a confirmed Labor secretary.

Under the blocked rule:

The annual salary threshold for exempt positions would have morethan doubled from $23,660 to $47,476.

Employers would have been allowed to use nondiscretionary bonuses to satisfy up to 10 percent of the general salary threshold, provided the incentives were made on a quarterly or more frequent basis.

There would have been no change in the general duties test used to determine whether employees earning more than the salary threshold must be classified as nonexempt from overtime, including the exemptions for executive, administrative and professional positions, among others.

For highly compensated employees (HCEs), who may be classified as exempt if they meet the criteria of a less-stringent duties test, the final rule would have raised the annual HCE salary threshold from $100,000 to $134,004.

The DOL could drop its appeal of the Texas district court ruling, but the AFL-CIO is seeking permission to defend the rule, should that happen, McCutchen explained. A better path forward, in her view, would be for Trump's DOL "to restart and redo the overtime regulation, setting the salary threshold at about $35,000, where I think it should be."

FLSA Overtime Rule Compliance

For more overtime compliance news, tips and tools, check out the SHRM resources provided below:

A "restart and redo" would require the DOL to propose an administrative delay of the rule as revised by the Obama administration, followed by a new notice of proposed rule-making and comment period, leading to a new final rule.

Most employers believe that an increase in the salary threshold was needed, or at least inevitable, McCutchen said, but they saw the revised rule's threshold as far too high, "excluding people who obviously meet the FLSA's duties test" because of the discretion and independent decision-making required in their jobs.

The revision particularly hit hard establishments such as "retail restaurants in the lower South and Southwest," she noted, where the cost of living and average wages are lower than in other parts of the country. "In the 'flyover country' that voted for Donald Trump, there aren't so many people who make $50,000 a year," meaning that most positions would have become nonexempt, requiring mandatory overtime pay.

Under the Trump administration, she looks forward to a salary threshold "that is workable not only in New York and San Francisco, but also in Mississippi and Arkansas."

The timeframe for putting a new rule in place with a salary threshold in the range of $35,000 to $38,000 "could be a year or so down the road," so probably sometime next year, McCutchen said.

Acosta Suggests a Threshold 'Around $33,000'

The Department of Labor's controversial 2016 rule expanding the number of workers who qualify for overtime pay should be updated to match inflation, according to President Donald Trump's nominee for labor secretary.

"I believe the salary threshold figure would be somewhere around $33,000" after figuring for inflation to the cost-of-living since 2004—the last time the regulation was adjusted—said DOL Secretary nominee Alexander Acosta, during a March 22 confirmation hearing before the Senate Health, Education, Labor and Pensions Committee.

Acosta indicated that once confirmed, he would first decide whether the department would continue to appeal a Nov. 2016 federal court decision that halted the Obama-era rule on overtime pay. The nominee did not say which way he was leaning on the pending litigation, but indicated that the DOL will review and possibly revise the rule.

"Something that needs to be considered is the impact on the economy, nonprofits, and geographic areas with historically lower wages, but I'm very sensitive that it hasn't been updated since 2004," he said.

When McCutchen asked conference attendees how many had reclassified exempt employees as nonexempt at their organizations before the court injunction, about half of the audience raised their hands. Some employers had told exempt employees being paid a salary between $23,660 and $47,476 that they would henceforth be reclassified as nonexempt and paid hourly. Subsequently, they informed these workers that they'd stay exempt after all while regulatory matters are sorted out. While some of these workers would rather stay exempt, others had looked forward to earning overtime pay.

"Here's a radical idea," McCutchen said. "Why don't you ask employees [in this situation] if they'd prefer the flexibility that goes with exempt status—which many also see as a symbol of achievement—or if they'd prefer the overtime pay," and then classifying them accordingly.

If employees were made nonexempt and don't want to change back, new hires for a comparable position don't necessarily need to be nonexempt as well, she noted. But employers must be sure to accurately code these positions to distinguish exempt or nonexempt jobs. For instance, they might code Accountant No. 1 as a nonexempt position, but code Accountants No. 2, 3 and 4 as exempt. Also, written job descriptions should indicate why the position is exempt or nonexempt.

Another common situation involves employees whose salaries were raised to at least $47,476 to keep them exempt. One response would be to "slow down their salary increases over the next two to three years until they get back to where you think they should be" in terms of market pay, McCutchen suggested.

As to the bonus provision in the Obama DOL's rule revision, allowing certain kinds of incentive pay to be used to reach the salary threshold, McCutchen said if the threshold increase is set back to the $35,000 to $38,000 range, "there would be no need for that extra complexity, which is contrary to the concept of guaranteed salary." She called the allowance of incentive income to satisfy the salary threshold "a gift to class action attorneys," since "it would have led to a tremendous number of lawsuits. It shouldn't be necessary at a salary level that is reasonable."

McCutchen said under a Trump DOL revised rule, the HCE salary threshold may also go up from the current level of $100,000 if the general salary threshold is raised, "but it also might stay where it is; we'll have to wait and see."

Under the Trump administration, McCutchen expects there will be more opportunity for employers to work cooperatively with the DOL to achieve compliance. "Submit requests for opinion letters if you have questions," she advised.

McCutchen is also hoping to see the DOL "bring back employer incentives for voluntary compliance," for instance to encourage employers to work with the DOL to correct classification errors, "and more use of carrots instead of the stick."

Was this article useful? SHRM offers thousands of tools, templates and other exclusive member benefits, including compliance updates, sample policies, HR expert advice, education discounts, a growing online member community and much more. Join/Renew Now and let SHRM help you work smarter.